overlap. No disharmony exists in assessing additions to tax under both sections.

Finally, we do not accept petitioners' assertion that their negligent actions in failing to timely file returns were expunged by their later act of filing returns which contained self-assessing additions to tax under section 6651(a)(1).

2. Section 6661(a) Additions

Next, we must decide whether petitioners are liable for an addition to tax under section 6661. Section 6661(a) provides for the addition to tax if there is a substantial understatement of income tax for the taxable year. Section 6661(b) provides that a "substantial understatement" exists if the amount of the understatement of income tax for the year exceeds the greater of 10 percent of the tax required to be shown on the return, or $5,000. (Here, the understatements of tax for 1982 and 1983 were $49,489 and $5,697, respectively.)

Petitioners interpret section 1.6661-2(d)(2), Income Tax Regs., in a manner which would not make them liable for the section 6661 addition to tax. In relevant part, section 1.6661-2(d)(2), Income Tax Regs., provides:

For purposes of section 6661, the amount of tax shown on the return for the taxable year is determined * ** without regard to any amount of additional tax shown on a return (including an amended return, so-called) filed after the taxpayer is first contacted by the Internal Revenue Service *** If concerning the tax liability of the taxpayer for the taxable year. no return was filed for the taxable year or if the return (other than a return filed under section 6014) shows no tax due, the amount of tax shown on the return is considered to be zero.

Petitioners argue that since they did not file returns until after they were contacted by a special agent, their late returns, being "original returns," did not show any "additional tax."

Section 6661 was enacted in 1982 to, inter alia, enhance taxpayer compliance and deter taxpayer participation in the "audit lottery" whereby taxpayers take questionable positions on their tax returns in the hope that they will not be audited. S. Rept. 97-494, at 272 (1982). Petitioners assert that section 6661 was intended to apply to "wrong positions taken on filed returns that create substantial tax deficien

cies and not to "late-filed" returns. We do not agree with petitioners' position.

The compliance purpose of section 6661 is to provide an incentive against taking highly questionable positions which go undetected through either failure to file or failure to provide adequate disclosure on a filed return. In our opinion, a taxpayer who fails to timely file a return until after he is contacted by the Internal Revenue Service is as much a participant in the audit lottery as a taxpayer who submits a timely return containing highly questionable positions.

Our reading of section 6661 and its legislative history convinces us that imposing section 6661 additions to tax against petitioners is not beyond the scope of the statute. Prior to being contacted by the special agent, petitioners had not filed tax returns for the years 1977 through 1983. Consequently, prior to contact, the amount of tax shown on the returns is zero. Sec. 1.6661-2(d)(2), Income Tax Regs. The amount of tax shown on the returns filed subsequent to contact by the Internal Revenue Service is therefore "additional" to the zero amount prior to contact and is plainly within the intendment of section 1.6661-2(d)(2), Income Tax Regs. Accordingly, we hold that section 6661 is applicable where a delinquent return is filed after the taxpayer is first contacted by a representative of the Internal Revenue Service.

We now consider whether it is appropriate to calculate the section 6661 addition to tax using a 25-percent rate. Petitioners argue that to apply section 6661 at the increased rate of 25 percent (instead of 10 percent) is a denial of due process.

In Pallottini v. Commissioner, 90 T.C. 498 (1988), we held that the applicable rate under section 6661 is 25 percent for additions assessed after October 21, 1986. In so holding, we concluded that section 8002(c) of the Omnibus Budget Reconciliation Act of 1986 (OBRA 1986), Pub. L. 99-509, 100 Stat. 1874, 1951 which was signed into law on October 21, 1986, controlled over section 1504 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2743 which was signed into law on October 22, 1986.

Petitioners contend that because the October 21, 1986, effective date subjects returns filed prior to that date to the increased rate, the retroactive application of the increased 25-percent rate is unconstitutional. They argue that the effective date provision of the OBRA 1986 amendment to section 6661(a) is a retroactive increase in violation of their due process rights because it punishes conduct which occurred prior to its enactment. We disagree.

Petitioners cite Untermyer v. Anderson, 276 U.S. 440 (1928); United States v. Darusmont, 449 U.S. 292 (1981); and Commissioner v. Acker, 361 U.S. 87 (1959). In Untermyer, a newly enacted gift tax statute was found to be unconstitutional insofar as it applied to gifts which were made and completely vested before enactment of the taxing statute. Untermyer is of "limited value in assessing the constitutionality of subsequent amendments that bring about certain changes in operation of the tax laws, rather than the creation of a wholly new tax." United States v. Hemme, 476 U.S. 558, 568 (1986). This case does not involve the imposition of a "new tax"; therefore, Untermyer is inapposite.

In Darusmont, the Supreme Court addressed the constitutionality of the 1976 amendments to the alternative minimum tax provisions enacted in 1969. It therein held that the retroactive application of the subsequent amendment to the 1969 enactment did not constitute the imposition of a new tax and, hence, was constitutionally permissible. United States v. Darusmont, supra at 299-300.

It is clear that the effective date provision of OBRA 1986 was an amendment to an existing addition to tax rather than the creation of a new addition to tax. As such, the application of the 25-percent rate to section 6661 additions to tax assessed after October 21, 1986, is not constitutionally impermissible.

Petitioners assert that "penal statutes are to be construed strictly," Commissioner v. Acker, 361 U.S. at 91, and that they should not be "subjected to a penalty unless the words of the statute plainly impose it." Section 8002, OBRA 1986, 100 Stat. at 1951, provides, in relevant part, as follows:

SEC. 8002. INCREASE IN PENALTY FOR SUBSTANTIAL UNDERSTATEMENT OF LIABILITY.

(a) IN GENERAL.-Subsection (a) of section 6661 of the Internal Revenue Code of 1954 (relating to substantial understatement of liability) is amended to read as follows:

"(a) ADDITION TO TAX.-If there is a substantial understatement of income tax for any taxable year, there shall be added to the tax an amount equal to 25 percent of the amount of any underpayment attributable to such understatement."

(b) EFFECTIVE DATE.-The amendment made by subsection (a) shall apply to penalties assessed after the date of the enactment of this Act. Here, section 8002 clearly imposes the increased rate to section 6661 additions to tax assessed after October 21, 1986, the date of enactment. Thus, petitioners' reliance on Acker is misplaced.

Petitioners' final argument is that the additions to tax under sections 6651, 6653, and 6661 are not cumulative. They cite no authority for this position. This is not surprising because the provisions of section 6661(b)(3) contradict their argument.

Section 6661(b)(3) coordinates the application of section 6661 with section 6659. Under its provisions, the section 6661 addition to tax is not imposed on that portion of the substantial understatement on which a section 6659 addition is imposed. Except with respect to section 6659, the statutory language of section 6661 does not preclude the assessment of the additions to tax under sections 6651 and 6653 with the section 6661 addition. Moreover, the legislative history of section 6661 recognizes the potential for additional additions to tax to apply.3

In sum, we hold that petitioners are liable for the section 6661 additions to tax for 1982 and 1983 in amounts equal to 25 percent of the underpayments of tax for those years.

Decision will be entered for the respondent.

"The conference report relating to sec. 6661 states:

Under present law, penalties may be imposed on the failure to pay certain taxes shown on a return or required to be shown on a return, unless such failure is due to reasonable cause and not willful neglect. If the failure is due to negligence or fraud, additional penalties may apply. [H. Rept. 97-760 (Conf.), at 574 (1982), 1982-2 C.B. 600, 649.]

PETER E. MAXWELL AND HELEN E. MAXWELL,
PETITIONERS v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT

HI LIFE PRODUCTS, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 37185-86, 37186-86.1 Filed July 31, 1990.

P and his wife were the founders, controlling shareholders, and principal officers of H. P sustained serious physical injuries while in H's employment. P served a written demand upon H asking compensation for his injuries. Thereafter, based upon the advice of their respective attorneys regarding H's liability, P and H executed a settlement agreement under which H paid P $122,500. Held: The payment from H to P was for damages on account of personal injuries. P is entitled to exclude this amount from gross income under sec. 104(a)(2), I.R.C. 1954, and H is entitled to a deduction in this amount under sec. 162(a).

Jeffrey R. Matsen, Gregory K. Wanlass, and Robert K. Strouse, for the petitioners.

Joseph E. Mudd and Laura Karlak, for the respondent.

FINDINGS OF FACT

RUWE, Judge: Respondent determined a deficiency of $64,185 in Peter E. Maxwell's and Helen E. Maxwell's Federal income tax for the taxable year ending December 31, 1977. In a separate notice of deficiency, respondent determined a deficiency of $58,800 in the Federal corporate income tax of Hi Life Products, Inc., for its taxable year ending October 31, 1977. The issues for decision are: (1) Whether petitioner Hi Life Products, Inc., is entitled to deduct as an ordinary and necessary business expense under section 162(a)2 a payment of $122,500 made to Peter E. Maxwell; and (2) whether petitioner Peter E. Maxwell is entitled to exclude from income, as damages on account of

'On June 30, 1988, this Court granted respondent's motion to consolidate the case at docket No. 37186-86 with the case at docket No. 37185-86 for trial, briefing, and opinion.

2Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.